Paying rent is one of the biggest money-wasters out there, and probably one of the most overlooked. It’s like smoking. Smokers come up with so many justifications, telling themselves that smoking “relieves stress”, that it’s just a habit, reassuring loved ones that the are still healthy in other ways because of exercise and healthy eating.
Similarly, we justify paying rent. “Gotta live somewhere”. “Rent is part of life/adulthood”. “Don’t wanna be homeless”, etc. Such statements ultimately distract renters from the core truth, that they literally throw away money each month in exchange for the most basic (if not unsanitary, over-priced, and downright depressing) living conditions.
As of 2014, 11 million Americans spent half or more of their income on rent, and 21.3 million spend at least 30 percent. Are you one of them? Consider the lunacy in making rent and high student loan payments some of your top two outgoing expenses. It is choosing an eternity of working hard while never having anything to show for your work – specifically convenience, comfort, and luxury.
Get ready, because I’m going to tell you every single thing you need to know about how to stop renting and start paying a mortgage. I’m going to help you get out of the rent trap, and in so doing help you get out from under your six figure student debt.
The three components of being able to buy a property are:
- A little bit of cash
- A decent income
- Decent or good credit
“I have none of those,” I can hear you saying. No problem. I’ll tell you how to get them. You are probably over-estimating how much cash you need and how good your credit has to be anyhow.
The bar for a little cash, a decent income, and decent or good credit is lower than you think. I used to assume these three factors affected my ability to buy any property, but what they actually affect is how low of an interest rate you can get on your mortgage, not whether or not you can buy at all.
First, the cash. In the days of our parents, it was customary to pay 20 percent of a home’s purchase price for a down payment, and an additional 3 percent for closing costs. Today, however, it is possible to get a home with only 3.5 percent down, 3.5 percent in closing costs, and a credit score of at least 580. I am not necessarily recommending that route but I want to first implant the knowledge that it is possible.
Step 1: Find a Mortgage Broker
“Don’t I need to find a house I like before I find a mortgage broker?” The answer is a resounding no. Find your broker before you look at a single property, because it will encourage good real estate agents to work with you and show you the best properties. Go to Yelp.com in your city and in the “Find” [search] box enter the words “mortgage broker”. Regardless of where you live, a lot of companies will come up. Rank by rating, and click on some of the people with 4.5 or 5-star reviews, then start reading what other people have written about them. What you want to see are recent reviews by people who rave about how the mortgage broker was kind and courteous, honest and efficient, and found great rates.
Get in touch with one or a couple of these brokers. You need to tell them how much you are currently making (salary-wise), how much cash (if any) you can put towards a down payment, and where you are looking to buy (neighborhood preferences, etc). After answering a few questions, your mortgage broker should be able to tell you your budget, and write up a pre-approval letter that simply says they can get you the funding to afford a property for that price. This entire process takes between a day and a week. Nine out of ten people shopping for real estate don’t have pre-approval letters. You have one because you probably don’t have much money to put down and you won’t be shopping for the most expensive properties, so this letter shows real estate agents that they are safe to work with you, and show you properties.
Step 2: Find some properties online that you want to view
Now that you know your budget, start your shopping online. Some sites I like are:
Do a search by budget. Then brace yourself – if you live in an expensive area or in a big city, you might find that what you can afford limits you to less-than-ideal neighborhoods, older homes, etc. You might choose to get creative at this point. Ask to borrow some money from a family member or your spouse, to see if you can afford something a little more expensive. If you are into repairs and home improvement you might choose to go with something cheaper and fix it up along the way.
If you are buying a house (vs a condo), you will have to think about things like regular maintenance, snow shoveling, grass cutting, etc. If you are looking at buying an apartment or a condo, you’ll pay the management company a small price to do this for you (otherwise called the HOA). HOA can run anywhere from $150 per month to $1000 per month, depending on what facilities the condo has. Since you are required to pay the HOA every month as an owner, make sure you can afford the mortgage plus whatever the HOA is.
Step 3: Contact the agents from the listings you like, and go on viewings with a few different ones until you find someone great.
In the beginning, you need to take some time to feel out these real estate agents. Some are smart, kind, and trustworthy. Others are condescending, sales-y idiots. A good real estate agent can be a long-lasting friend. (I still go out to dinner once a month with my agent.) He or she will be your No. 1 fan with sellers. They’ll confidently boast how awesome you are and why they should give you the best deal, read every clause of every piece of paperwork to make sure you’re not getting ripped off, and in some extreme cases even lower commission with the seller so that you can afford more house. A good real estate agent is a person you can excitedly text at 11:30 p.m, from your bed as you find an amazing property on Zillow. They will drive all over creation tirelessly with you, bring coolers full of water and cliff bars to make it through long days of viewings. Good real estate agents are awesome. You will probably sense when you are talking to one, because you’ll be able to click and joke around and feel like you’re in good hands. You can find a good real estate agent. They are out there. Similarly, you’ll also know when you are talking to a shitty agent. He or she will come across as pushy, ask dumb questions, make boring conversation, and let you do most of the work.
To find a good agent, contact a few people at first and have them show you a property or two or three. After a handful of viewings, you will probably find one agent that you actually enjoy spending time with. You can now choose to work with that person exclusively. You really do need to enjoy spending time with this person, because you’ll be communicating with them daily for the next month or so.
Step 4: Write several offers
If you are working with a non-conventional loan (which your mortgage broker will inform you about), you may come across homes that either don’t want to sell to people using non-traditional types of loans. You may also see some places that are slightly out of your range and decide to make low-ball offers. All of this is fine. Your real estate agent and mortgage brokers will do whatever paperwork necessary for placing offers on as many properties as you want, and they will do it with a smile. If multiple offers get accepted, it’s no problem because in almost all cases, you’ll have up to three days to make your decision and put money down on only one of them. It costs nothing to make offers – nothing to you, your mortgage broker, or your real estate agent.
Step 5: Once one of your offers is accepted, just do what you are told.
Once an offer is accepted, it is the beginning of the end. You will now embark on a ridiculous amount of paperwork and negotiation. Your mortgage broker will request tax returns, paycheck stubs, and statements from any asset or liability you have, such as bank statements, credit card bills, student loan statements, paycheck stubs, retirement savings, and the like. Your real estate agent will be busy setting up home inspections which you may need to attend and evaluate. After about a month or two of running around like a crazy person, you’ll make your down payment and collect your keys.
With a little more work you can spruce up the place you just bought and feel a huge and overwhelming sense of pride telling people, “I just bought a little place in [insert city or neighborhood here]”.
Every mortgage payment, which will probably be similar if not slightly higher or lower than your previous rent payment, is money you will probably see again when you sell your house. Gone are the days of flushing money down the toilet. Gone are the days when you will ever have to pay rent again.
Purchasing your own home also builds self esteem, an added benefit that gives you the energy and confidence to keep paying down high student debt.